“K-Dur” fight reaches Court (UPDATED)

Posted Fri, August 24th, 2012 10:46 pm by Lyle Denniston

UPDATED Monday p.m. The case discussed here has been docketed as 12-245.

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The years-long fight over the legality of attempts by brand-name drug manufacturers to head off imminent competition from makers of generic substitutes for their drugs returned to the Supreme Court Friday afternoon in a case that resulted in an appeals court ruling that such transactions violate antitrust law — the first court at that level to do so. In the high-profile “K-Dur” case of Merck & Co., Inc., v. Louisiana Wholesale Drug Co., the petition and appendix can be read here.

The case appears to have a strong chance of being reviewed by the Court, because lower courts are split on the legal question — and, in fact, two appeals courts have ruled in conflicting ways on the specific deal at issue in Merck’s appeal.

At issue are so-called “reverse payment agreements” — deals in which a brand-name pharmaceutical company agrees to pay a generic company to drop its bid to enter the market for that drug, and to remain out of the market for a specified time that protects the brand-name owner’s right to maintain its patent monopoly to make and sell that product. The Third Circuit Court, in a widely followed case, ruled in July that a deal to pay a generic company to stay out of the market for a given period amounts to strong evidence that competition has been harmed, with the brand-name company then obliged to prove that such a deal actually promotes competition that otherwise would not exist.

Its decision broke a trend that had prevailed for more than a decade, in which appeals courts had consistently found that antitrust law allows such an arrangement, so long as the restriction on entering the market is no greater than what the owner’s patent actually protects. Merck’s new petition contended that the Third Circuit ruling “dramatically departs from the prevailing view,” but also contradicts a decision by the Eleventh Circuit Court upholding the specific payment deal that is involved. The conflict, Merck said, “involves a question of universally acknowledged importance….This case is the epitome of a suitable vehicle for the Court’s review.”

This dispute involves the marketing of a supplement for treating side effects that result from the use of high-blood-pressure medicines; Schering-Plough Corporation — now owned by Merck — won a patent in 1989 for its product under the brand name “K-Dur.” The patent is not for the underlying substance — potassium chloride — but rather for an invention that coats small particles of that substance so that it is released more slowly to increase its effectiveness. The invention allowed a patient to obtain a full day’s dosage of potassium by taking a single tablet. A Merck subsidiary, Key Pharmaceuticals, Inc., has been assigned the patent, which was set to expire on September 5, 2006.

Some 11 years before that expiration date, in August 1995, Upsher-Smith Laboratories, a generic manufacturer, asked the federal government to approve for marketing a generic version of K-Dur. The patent owner countered with a lawsuit claiming infringement, but Upsher argued that Schering’s claim was “baseless” and that Upsher was not violating any patent rights. In 1997, shortly before a federal judge was to rule, Schering and Upsher reached a deal. Upsher agreed to hold off on marketing its version until September 1, 2001, when it would get a license to make and sell its version. In return, Schering agreed to pay Upsher $60 million over three years. Schering also gained the right to make and sell some of Upsher’s drugs.

Also in 1995, ESI Lederle, the generic division of American Home Products, Inc. (now part of Pfizer, Inc.), also sought government permission to put out its own generic version of K-Dur. Schering also sued ESI for infringement, but ESI countered that its version was not the same as Schering’s. After the two sides started mediating their dispute, they reached a settlement. Schering gave ESI a royalty-free license starting on January 1, 2004. The patent owner also paid ESI $5 million up-front, with further payments if the government allowed ESI to market its version. After the Food and Drug Administration gave ESI permission to sell its generic version of K-Dur, in 1999, Schering paid it another $10 million.

The Federal Trade Commission challenged the three companies involved in the two deals in 2001, claiming restraint of commerce under the FTC Act. The aim, the Commission argued, was to delay entry to the market of cheaper generic versions of K-Dur in order to prolong Schering’s patent monopoly That led to an FTC ruling against both deals. In response, Schering appealed to the Eleventh Circuit, which overturned the FTC and upheld the settlement. Relying upon its own precedent in an earlier ruling that the Supreme Court had declined to review in 2004, the Eleventh Circuit found the settlements had not been shown to restrict competition beyond what the K-Dur patent itself had insulated. The FTC, without the support of the Justice Department, tried to get the Supreme Court to review that ruling, but the Justices refused in 2006.

After the FTC had ruled, a group of wholesale and retail buyers of K-Dur — including such chain stores as CVS Pharmacy, Kroger Co., Rite Aid, Safety, Walgreen, Eckerd’s and others — filed their own antitrust lawsuit against Schering and Upsher. Those cases wound up in a federal District Court in New Jersey, with the challengers arguing that the deals violated the Sherman Act’s Section 1, which outlaws restraints of trade. A special master and a District Court judge ruled against the challengers, finding no evidence that the deals exceeded the scope of Schering’s patent rights.

That is the result the Third Circuit Court partly overturned this summer. While it said that name-brand and generic companies could reach deals on when a generic company could enter the market with its own version, paying for such a delay had to be scrutinized under antitrust law. It then found that any payment to a generic challenger who had agreed to delay entry into the market was “prima facie evidence of an unreasonable restraint of trade,” thus shifting to the patent owner the duty to show that the deal was for a purpose other than postponing market entry or else that it offered some benefit to competition. It stressed that its ruling was confined to payments made in the pharmaceutical industry, between a brand-name patent holder and a generic company. It ordered the District Court to take a new look at the deals under the standard the Circuit Court had laid down.

In asking the Supreme Court on Friday to review that decision, Merck’s lawyers argued that, with the conflict now fully developed over the validity of such payment agreements, “all of the interested parties — private plaintiffs, defendants, and the federal government — agreed that the issue presented is of enormous legal and practical significance.”

Merits Case Pages and Archives

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